Three Years After the California Energy Crisis-A Plan to Avoid
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i THREE YEARS AFTER THE CALIFORNIA ENERGY CRISIS: A PLAN TO AVOID FUTURE SHORTAGES Brian Grant Jianhui Hu R. Taylor Moore Richard Power Brian Roth Kristen Surprenant Susan Tortell April 2004 Capstone Policy Analysis Pepperdine School of Public Policy All Rights Reserved © 2004 ii iii PREFACE This report was prepared as part of the Capstone Policy Seminar experience at the Pepperdine School of Public Policy. The Seminar, one of the integral parts of the preparation for students receiving the Master of Public Policy degree, provides students with the opportunity to explore a public policy program in depth and to prepare a set of specific recommendations to policy makers to solve the problem. These reports are prepared by a team of 6-8 students over the course of only twelve weeks, providing for an intensive and challenging experience. The results of the team’s analysis is then presented to a panel of experts in a public workshop setting where the student panelists are given the opportunity to interact directly with the policy professionals, not only presenting their findings but engaging in an exchange of ideas and views regarding the specifics of those recommendations. The policy expert panel for this report included RAND expert Mark Bernstein, Mark Minick from Southern California Edison, and Senior Economist Christopher Thornberg from the UCLA Anderson Forecast. The School of Public Policy would like to thank our students for their hard work and commitment in preparing this policy analysis. We are proud of your achievement. iv EXECUTIVE SUMMARY California’s electricity system is in danger of experiencing future blackouts. Demand for electricity is expected to surpass supply in the near future. The soaring population, increased usage of electronic technologies, and a lack of effective conservation measures are driving the increase in demand. Increases in the supply of electricity are not keeping pace with those of demand. This paper focuses primarily on increasing supply side measures to meet California’s future energy needs. While demand side measures are important, particularly in order to keep consumers in touch with the issue, they will fall short of supply side measures in their ability to effectively close the fast approaching demand-supply gap. California could experience another energy crisis as early as 2006. This paper recommends policy measures to create both short and long-term supply; thereby, averting the prospect of leaving Californians, once again, in the dark and in debt. The status quo of California’s energy picture has improved significantly from the drastic condition it was in during the midst of the 2000-2001 crises. However, much more needs to be done in light of demand- supply projections. California needs to broadly restructure its electricity system. There are currently twelve plants scheduled to come on line by March 2006, but only three are actively being constructed. Infrastructure issues are being addressed and bottlenecks are being fixed, but the California Energy Commission (CEC) acknowledges that without more attention to the grid, there could be future transmission failures. But most importantly, the system is mired in a quasi price and production regulated state that does not provide incentives for companies to establish new power plants in California. This paper examines the options available to increase production and access to greater supply. First, we identify policy priorities against which we could measures the options to reorganize California’s energy landscape. We determined that measures taken to change California’s energy situation must meet a specific set of criteria. They must create a reliable and economically efficient energy supply that does not depend too heavily on any one method of production. They must not cause unacceptable damage to the environment, and must provide energy in a safe and socially responsible manner, including respecting private property rights and insulating lower income consumers from high prices. Then we consider several varied approaches with reference to our defined criteria. The four approaches are: production provided solely by the state, a completely unregulated energy market, mandated in-state private production, and a market rate driven model with the appropriate amount of regulation. v We conclude that a system based on market rate prices with minimal regulation best fits our criteria. We recommend measures that will create a foundation for competition in energy production and supply, primarily by gradually lifting retail price caps and by giving consumers the ability to choose their energy producers. Lifting retail price caps will create incentives for new production and/or for utilities to purchase power from out-of-state generators. Eliminating the disconnect between retail and wholesale prices will thus create a market-based price system and a responsiveness between demand and supply that is currently lacking. In helping to create such responsiveness, we recommend implementing real-time pricing mechanisms to be installed over the long term. We also recommend simplifying the plant approval process and reorganizing the regulatory agencies, in an effort to ease barriers to the entry of production. Lastly, we recommend using tradable energy credits as a method for utilities to more easily satisfy current legislation, which requires the use of diversified energy sources. California needs more energy supply. It will have to pay for it either through higher prices or higher taxes. If instituted, our recommendations will create a competitive market where the stability and consistency of regulation will create confidence in investors and consumers. Not only will California be confident its lights will stay on, but, while prices to consumers will rise initially, a competitive environment may eventually provide the benefits of reliability, lower prices, better service and choice of energy sources, as is enjoyed by other similarly structured states. vi TABLE OF CONTENTS Preface...........................................................................................................................................iii Executive Summary..................................................................................................................... iv Table of Contents ......................................................................................................................... vi Abbreviation Chart....................................................................................................................viii Introduction................................................................................................................................... 1 The Supply and Demand Gap in California .............................................................................................1 The Demand-Reduction Argument .......................................................................................................1 The Question of Capacity.....................................................................................................................3 The Electricity Imbalance and Bad Policy Cocktail ............................................................................3 The History of California’s Energy Market............................................................................... 6 California’s Energy Market Today........................................................................................... 10 Transmission System Report ..................................................................................................................10 Retail Price Caps ....................................................................................................................................12 Consumer Choice ...................................................................................................................................12 Status Quo of The California Investor Owned Utilities .........................................................................12 Environmental Permitting of Power Plants in California .......................................................................14 Expedited Approval Process ..............................................................................................................15 Uncertainty.........................................................................................................................................16 Permitting and Operating Delays ......................................................................................................17 The Regulatory Authoritative Body .......................................................................................................18 Summary: California’s energy market today..........................................................................................19 Policy Priorities ........................................................................................................................... 20 Strategies to Increase California’s Energy Supply.................................................................. 22 Public Production Model........................................................................................................................22 Free Market Electricity Model ...............................................................................................................24 Instate Production Model........................................................................................................................25